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An inverted U-shaped crude oil price return-implied volatility relationship

Listed author(s):
  • Agbeyegbe, Terence D.
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    We examined the return–volatility relationship for USO ETF oil price return and CBOE Crude Oil ETF Volatility Index, OVX. The data for the USO and OVX covers the period covering May 11, 2007 to February 28, 2013. Our OLS regression results suggest evidence of regular feedback and leverage effects. When we employ linear quantile regression techniques, we find evidence of regular and inverse feedback effects. The inverse feedback effects being noticeable in the upper quantile region of the oil return distribution. There is also support for a regular leverage effect in USO prices. We also examined the return–volatility relationship using quantile regression copula methods for measuring the degree of asymmetry in the relationships between the oil price return and implied volatility. The results of the analysis indicate, first, that there exists a negative relationship between contemporaneous oil VIX and USO ETF oil returns. Second, that the relationship between oil returns and implied volatilities depends on the quartile at which the relationship is being investigated. Third, there exists an inverted U-shaped dependency relationship between returns and implied volatilities across quantiles. Fourth, though an inverted U-shape exists, the shape is different from those observed in stock markets.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1058330015000531
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    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 27 (2015)
    Issue (Month): C ()
    Pages: 28-45

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    Handle: RePEc:eee:revfin:v:27:y:2015:i:c:p:28-45
    DOI: 10.1016/j.rfe.2015.08.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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